US dollar forecast: A closer look at the dollar’s performance in December

Close-up of bank notes in different currencies
Matt Simpson financial analyst
By :  ,  Market Analyst

Back in early November, I outlined a bearish scenario for the US dollar given it had just formed a weekly bearish engulfing candle – and history had shown they rarely occurred in isolation. Four weeks later I’m pleased to see that it fell through the initial 104 target and came very close to 102, a target outlined in a subsequent article.  

 

Whilst it shows the potential to bounce further from here, we note a tendency for the dollar to top around now on an intraday basis – and that Tuesday’s high stalled around a cluster of volume.

 

Related analysis: S&P 500 forecast: A closer look at ‘Santa’s rally’

 

US dollar index technical analysis (weekly chart):

A small doji week formed around the 100-week EMA, which closed above 1.3 for a second week despite an intra-week attempt to break beneath it. If the dollar index were to close around current levels this week, it would form a three-week bullish reversal called a morning star pattern. This pattern does not provide an upside objective, although it could point towards and important swing low which markets seem happy to ignore as they relish the ‘Fed cuts in 2024 theme’.

 

Given the retracement from the 107.50 high nearly reached the 61.8% Fibonacci retracement level, a countertrend move does not seem unreasonable ahead of its next leg lower. However, with seasonality against the US dollar in December – we may find the upside potential is limited unless the Fed surprise with a hawkish hold next week.

 

20231206dxyWK

 

US dollar index seasonality

The chart below shows basic seasonality of the US dollar over the past 52 years, using average percentage returns and win rate (the percentage of times a particular month closed higher). As this data set precedes the euro – which accounts for ~57% of its weighting, it is assumed that the data has been synthesised using the Deutschmark prior to the euro’s inception.

December stands out as the most bearish month for the US dollar, with an average return of -0.8% in December. Furthermore, it has the lowest win rate of just 34.7%, meaning it has closed higher 65.3% of the time.

 

20231206usdseasonality

 

And if we look at the US dollar’s performance on a daily basis within December, there is a steady downtrend using data since 1971, with a peak on December 6th (today) and its next trough on December 16th (two days after the next FOMC meeting…) Also note that the bearish trend on December mostly ties in with the seasonal tendency for the S&P 500 to rally in the second half of December, also known as ‘Santa’s rally’.  

 

If the intra-month seasonal pattern is to be followed this month, it suggests an interim top could form today (if not soon) for another leg lower into next week’s FOMC meeting. At which point a minor rally could then form, followed by its drop into the new year as equities presumably rally. If history were to repeat like a textbook, it could look something like this for the US dollar index.

 

20231206usdecemberpath

 

Of course, seasonal data simply looks at the average of part performance and should not be used as a lazy path to riches. But it is interesting none the less.

 

 

US dollar index technical analysis (4hour chart):

The move higher on the US dollar index is now third wave way, although remains too soon to tell whether it is a 5-wave impulsive move higher or nearing the end of an ABC retracement. However, Tuesday’s high stalled near a HVN (high volume node), with another volume cluster forming near the monthly pivot point. And that suggests a potential high could be close.

 

A move to 104.50 does not seem unreasonable, but a break above it could see the rally extend due to the liquidity gap between 104.50 – 105.30. But if we see momentum turn lower beneath or around 105.50, we could assume the US dollar is tracking its seasonal pattern and seek a break beneath 103 towards 102

 

20231206usdH4

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

 

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